Urban Agglomerations and Wage and Self-employment Jobs in Ethiopia

Abstract

Agglomeration effects on the workers’ and firms’ productivity in developed countries are widely confirmed by previous studies, while empirical evidence for developing countries is still limited. This paper sheds light on another urban productivity factor that is particularly important for developing countries: self-employment and wage jobs. The transition from the economy dominated by the former to the one by the latter is a key to economic development. This study examines how urban agglomerations are linked to the mix of self-employment and wage jobs by focusing on one of the least urbanized low-income countries: Ethiopia. Applying an instrumental variable approach to worker-level cross-sectional data, the analysis finds a negative link between town population size and the share of self-employment workers: a log increase in town population size lowers the probability of engaging in self-employment by 7.9 percentage points. Particularly female, young, and less-educated workers are more likely to work with wage jobs in larger towns. The findings suggest a crucial link between urban agglomerations and employment modes in the developing world.